Knockoffs Unlimited, a nationwide distributor of low-cost imitation designer nec
ID: 2550011 • Letter: K
Question
Knockoffs Unlimited, a nationwide distributor of low-cost imitation designer necklaces, has an exclusive franchise on the distribution of the necklaces, and sales have grown so rapidly over the past few years that it has become necessary to add new members to the management team. To date, the company’s budgeting practices have been inferior, and, at times, the company has experienced a cash shortage. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1. You are anxious to make a favourable impression on the president and have assembled the information below.
The large buildup in sales before and during May is due to Mother’s Day. Ending inventories should be equal to 40% of the next month’s sales in units.
The necklaces cost the company $4 each. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month’s sales are collected by month-end. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.
All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance. Insurance is paid on an annual basis, in November of each year. The company plans to purchase $18,400 in new equipment during May and $46,000 in new equipment during June; both purchases will be paid in cash. The company declares dividends of $16,200 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below:
The company wants a minimum ending cash balance each month of $50,000. All borrowing is done at the beginning of the month, with any repayments made at the end of the month. The interest rate on these loans is 1% per month and must be paid at the end of each month based on the outstanding loan balance for that month.
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
A schedule of expected cash collections from sales, by month and in total.
A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
A schedule of expected cash disbursements for merchandise purchases, by month and in total.
A cash budget. Show the budget by month and in total. (Round your intermediate calculations and final answers to the nearest whole dollar. Also, round down your interest calculations to the next whole dollar amount. Cash deficiency, repayments and interest should be indicated by a minus sign.)
A budgeted income statement for the three-month period ending June 30. Use the variable costing approach.
Knockoffs Unlimited, a nationwide distributor of low-cost imitation designer necklaces, has an exclusive franchise on the distribution of the necklaces, and sales have grown so rapidly over the past few years that it has become necessary to add new members to the management team. To date, the company’s budgeting practices have been inferior, and, at times, the company has experienced a cash shortage. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1. You are anxious to make a favourable impression on the president and have assembled the information below.
Explanation / Answer
a) Sales Budget April May June Quarter Budgeted Unit Sales 71,000 105,000 56,000 232,000 Selling Price per unit $10 $10 $10 $10 Total Sales $710,000 $1,050,000 $560,000 $2,320,000 b) 1b. A schedule of expected cash collections from sales, by month and in total April May June ,Quarter February sales = 32000 x $10 x 10% $32,000 $32,000 March sales = 45,200 x $10 x 70%; 45200 x $10 x 10% $315,000 $45,000 $360,000 April sales 71000 x 10 x 20%; 70% ;10% $142,000 $497,000 $71,000 $710,000 May sales 105,000 x 10 x 20%;70% ; $210,000 $735,000 $945,000 June sales 56,000 x $10 x 10% $56,000 $56,000 Total Cash Sales $489,000 $752,000 $862,000 $2,103,000 1c. A merchandise purchases budget in units and in dollars. Show the budget by month and in toal April May June Quarter Budgeted unit sales 71,000 105,000 56,000 232,000 Add: Desired Ending Inventory 40% x (may , june, july rspectively) 42,000 22,400 14,400 14,400 Total needs 113,000 127,400 70,400 310,800 Less: Brginning Inventory 28,400 42,000 22,400 28,400 Required purchases 84,600 85,400 48,000 218,000 Unit Cost $4 $4 $4 $4 Required $ purchases $338,400 $341,600 $192,000 $872,000 1d. A schedule of expected cash dibursements for merchandise purchases, by month in total April May June Quarter Accts. payable $110,800 $110,800 April purchases $169,200 $169,200 $338,400 May purchases $170,800 $170,800 $341,600 June purchases $96,000 $96,000 Total cash payments $280,000 $169,200 $170,800 $886,800
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